The International Monetary Fund has admitted China’s yuan into its elite reserve currency basket, formally recognising Beijing as a global economic power.

A vendor holds Chinese Yuan notes at a market in Beijing.(Reuters Photo)

The International Monetary Fund has admitted China’s yuan into its elite reserve currency basket, formally recognising Beijing as a global economic power.

The yuan, also known as the renminbi, will join the US dollar, euro, Japanese yen and British pound next year in the basket of currencies the IMF uses as an international reserve asset.

The decision, taken on Monday, is an important milestone in China’s integration into global finances and a nod to the progress it has made with reforms.

MF Managing Director Christine Lagarde called the decision “an important milestone in the integration of the Chinese economy into the global financial system.”

“It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems,” she added.

To meet the IMF’s criteria, Beijing has undertaken a flurry of reforms in recent months, including better access for foreigners to Chinese currency markets, more frequent debt issuance and expanded yuan trading hours.

China’s central bank welcomed the decision which was backed by countries including the United States, Britain and Japan.

“Going forward, China will continue to deepen and accelerate economic reforms and financial opening up, and contribute to promoting world economic growth, safeguarding financial stability and improving global economic governance,” the People’s Bank of China said in a statement.

“Landmark recognition”

An IMF official said it was not its policy to disclose board voting records, but a person familiar with the IMF deliberations told Reuters approval had been unanimous.

An editorial in China’s official Xinhua news agency said the decision was a “landmark recognition” of China’s increased role in the global economy.

“The Chinese yuan clearly deserves a place in that grouping. China is the world’s second-biggest economy and top trader, and its currency is liquid and stable enough to serve as a store of value,” it added.

To be included in the SDR basket, the yuan had to meet the criteria to be “freely usable”, or widely used to make international payments and widely traded in foreign exchange markets, a yardstick it missed at the last review in 2010.

The decision puts the Bank of China under pressure to provide more transparency in line with its peers, such as the Federal Reserve and the European Central Bank.

Euro makes room

The new Special Drawing Rights formula gives more weight to financial variables and less to exports, reflecting long-standing criticism of the methodology but also cutting the euro’s share to 30.93%, from 37.4%.

The yuan will come in with a higher weight than sterling and yen, which will drop to 8.09% and 8.33% respectively, while the dollar remains broadly unchanged at 41.73%.

The addition is likely to fuel demand for China’s currency and for renminbi-denominated assets as central banks and foreign fund managers adjust their portfolios to reflect the yuan’s new status.

Moody’s Investors Service said it would give a confidence boost for investors in yuan assets and it expected more yuan-denominated bonds from non-Chinese issuers in China, and an increase in Beijing’s quotas for cross-border investment channels.